Uruguay TIFA with the US: Unraveling of Mercosur?

Thursday, February 1st, 2007

Press Releases, Brazil, Front Page, Argentina, Uruguay, Paraguay, Mercosur

Uruguay Signs a TIFA with the U.S.: Will this Mean an Unraveling of Mercosur or is Montevideo Maneuvering to be Left Out in the Cold?

In light of the Venezuelan Congress’ recent decision to grant President Hugo Chávez the power to rule by decree as well as the proposed nationalization of U.S.-held business, and other issues, COHA will soon be posting onto its website a transcript of Director Larry Birns’ January 26 interview over National Public Radio’s “On the media.” This network program is hosted by Bob Garfield and Brooke Gladstone and produced by Tony Field. The interview focuses upon some of the key issues concerning President Chávez’s bid for greater executive power, his controversial refusal to renew the public broadcasting license of Radio Caracas TV, the seeming lag in the development of Venezuelan democracy, as well as the future of U.S. - Venezuelan relations, and how editorial writers from the Washington Post, New York Times, and the Wall Street Journal who are critical of Chávez, at times distorts Venezuelan realities and fails to take into account crucial historical perspectives.

* Mercosur’s summit ends with no major accomplishments and with dissatisfaction growing among its smallest members, Uruguay and Paraguay

* Fears of a prospective FTA-caused rift among Mercosur members raise as Montevideo signs a TIFA arrangement with the U.S.

* Uruguay’s decision could pose a real threat to Mercosur’s unity and legitimacy in the region

* Washington would like to see Mercosur contained

On January 25, Uruguay signed a Trade and Investment Framework Agreement (TIFA) with the United States that could ultimately dismantle Mercosur and isolate Uruguay in the southern cone. This decision by Uruguay couldn’t come at a worse time for the trade body as it struggles to pacify its estranged members just days after the conclusion of the bloc’s lackluster summit. The Brazilian press was quick to dub the Rio de Janeiro meetings as “a complete waste of time.” In the aftermath of Mercosur’s relative indifference to Uruguay’s current incendiary dispute with Argentina over the construction of a pulp paper mill, Montevideo is looking to Washington for support. This decision was also motivated by the regional bloc’s inability to reach an agreement on reforms designed to address aggravating trade asymmetries between Mercosur’s more powerful nations (Argentina, Brazil and Venezuela) and its smaller members (Uruguay and Paraguay).

A TIFA, many practiced trade experts say, is often the prelude to a Free Trade Agreement (FTA). If Uruguay ultimately decides to sign a FTA with the U.S.— an option now being heavily debated and which Uruguayan officials have not ruled out—it would come in direct violation of Montevideo’s membership terms in Mercosur. Due to this dispute, Mercosur stands precariously at the brink of unraveling at a time when bilateral disputes and diverging agendas of the five full members seem to be taking center stage at the expense of their solidarity and all-important economic cohesion.

The Summit

The 32nd Mercosur summit meeting, widely anticipated as being the body’s most important gathering in years, was held January 18-19 in Rio de Janeiro. It was attended by the presidents of the five full member nations (Brazil, Argentina, Venezuela, Paraguay and Uruguay) as well as those of its associate member nations (Colombia, Bolivia, Chile and Ecuador—Peru is also an associate member, but President Alan García did not attend). Yet, despite high hopes among the Latin American public and officials alike, the meeting adjourned with few of its major issues resolved. Critics of the trade bloc attribute the recent weakening of its bonds to growing self-interest on the part of several member nations, as well as generally conflicting agendas. They cite the recent addition of Mercosur’s newest full member, Venezuela, as being indicative of the bloc’s volatility: “Mercosur is no longer about trade,” said Riordan Roett, director of Western Hemispheric Studies at Johns Hopkins University, who generally favors a conservative perspective. “The new joiners don’t have much to trade, they are opposed to free trade it seems. The organization is more and more political and to some degree anti-American.”

Among the unresolved issues at last week’s meeting, was trade asymmetry, a major concern of both Uruguay and Paraguay’s, and a primary propellant behind Montevideo’s recent move that could lead it to seek an alternative trade partner in the U.S. Although plans were finalized for Argentina and Brazil to begin financing development programs in Uruguay and Paraguay by means of a Structural Convergence Fund, no agreement was reached to firm up the existing trade tariffs. In fact, few dispute that Uruguay, along with Paraguay, have good grounds to argue that Mercosur mainly benefits its Goliath members, Brazil and Argentina.

Bolivia’s application for full membership was also one of the hot topics at the meeting. Bolivia has said that it would join the Common Market of the South (Mercosur) dependent upon two criteria being met: that its continued membership in the Andean Community (CAN) would be assured and that it be exempt from the common external tariff, one of the pillars of Mercosur. But Mercosur’s charter specifically forbids its members from having bilateral trade agreements outside the economic bloc. Allowing Bolivia to join Mercosur as a full member while remaining in CAN would set a precedent for tolerating bilateral negotiations by other Mercosur members and would undermine the trade bloc’s core mission.

Mercosur’s common external tariff is about 12 percent higher than Bolivia’s five percent. Nevertheless, by allowing Bolivia to join without complying with Mercosur’s tariff regulations, the bloc risks alienating (and perhaps even losing) its smallest members, Paraguay and Uruguay. Upon the creation of Mercosur in 1996, both nations explicitly asked to be exempted from complying with the terms of the common external tariff, and both were denied. Despite lengthy deliberations among Mercosur’s full members, the complexities involved with Bolivia’s application stymied any early agreement (at least for now) among the full members. Instead, the matter was passed on to a working group where it will be considered over the next six to twelve months.

Uruguay’s Discontent

Much of the inaction at the most recent Mercosur gathering stems from the rising and provocative border issue involving Argentina and Uruguay, which helped poison the prevailing atmosphere. The dispute revolves around Montevideo’s proposal to permit the construction of a private pulp paper mill on its side of the Uruguay River, near the community of Fray Bentos. For nearly two years now, Argentine activists have blocked trade along that river and severely limited construction in protest of what they see as a major future pollutant of the Uruguay River and its shoreline. Despite a study conducted by the World Bank concluding that the mill would not be environmentally hazardous, Argentine President Néstor Kirchner refused to take any action to disband the protestors. Tabaré Vázquez, Uruguay’s president, complained to the International Court of Justice (ICJ) in The Hague that the Argentines were impeding the movement of trade between the two countries, thereby violating a fundamental principle of Mercosur’s membership agreement. In response, Kirchner cited a 1975 treaty between the two countries establishing a joint management of the river. On January 23, the ICJ rejected Uruguay’s demand that Argentina remove its protestors from the area’s three bridges that span the border in that sector. The ICJ has yet to issue its final ruling on Argentina’s plea that if the paper mill came into production, it would be in direct contravention of Uruguay and Argentina’s joint agreement.

The Argentinean-Uruguayan bilateral clash increased tension and markedly dampened prospects for compromise at the January summit. When Uruguay attempted to bring up the dispute at the beginning of the proceedings, Argentina quickly shot down the initiative and the matter was dropped. Buenos Aires’s unwillingness to tone down its stance on the environmental issue became even more obvious later on when it vetoed every one of Brazil’s compromise proposals to amend the current trade asymmetry presently plaguing the Uruguayan and Paraguayan economies. Earlier, Uruguay sought Brazil’s and the other members’ support on the pulp mill disagreement, but the other nations were reluctant to get involved, insisting that the dispute was a bilateral matter that lacked any relevance to Mercosur’s recognized purview.

Seeking an Alliance With a Questionable ‘Big Brother’

In March of last year, Danilo Astori, Uruguay’s finance minister, criticized Brazil and Argentina’s indifference to his nation’s plight, observing that, “the serious bilateralism between Argentina and Brazil is damaging the smaller countries in Mercosur.” He went on to justify Uruguay’s intentions to seek a trade understanding with the U.S., stating “Uruguay’s problem is that [it] depends only on the goodwill of Brazil and Argentina.”

On January 25, Uruguay signed a TIFA with the United States. “We have now also agreed to work to expand, intensify and strengthen our trade relations,” said Vázquez. Although of limited importance in itself, it should be noted that of the more than twenty TIFAs that the U.S. has signed with other nations, one out of three eventually has led to a FTA. The U.S. already is Uruguay’s leading trade partner and a FTA with the U.S. could possibly give Montevideo the necessary political weight to gain some leverage on in its border dispute with Argentina.

Despite Vázquez’s provocative TIFA signing with the U.S., opposition to a U.S.-Uruguay trade deal remains strong within his own country. Reinaldo Gargano, Uruguay’s foreign minister, strongly opposes a FTA with the U.S. In his support of Uruguay’s ongoing allegiance to Mercosur, Gargano stressed “I continue working for a better Common Market of the South.” Opposition party leader Jorge Larrañaga also disagrees with the president’s decision to press ahead with a trade agreement with the U.S., arguing that the government is naive about the nations future. In reference to achieving a TIFA with Washington, Larrañaga also maintained that due to “internal problems” Vázquez is reluctant to “take the necessary steps.”

Undermining Mercosur: The Real U.S. Plan

The question still remains why the U.S. is pushing so emphatically for trade arrangement with Uruguay, with which, relatively speaking, it has only a negligible volume of trade. With a GDP of just $13 billion, a bilateral deal between Uruguay and the U.S. would be, according to the Financial Times, “economically insignificant for the US.” Yet the U.S. still pushes the merger. In truth, the major incentive behind the U.S. desire to sign a FTA with Uruguay may be less about what’s best for the small nation and more about working to unravel Mercosur and build up White House diplomatic and economic leverage in the southern cone.

Unquestionably, Mercosur is viewed by Washington as posing a threat to U.S. interests in South America. The bloc directly and successfully thwarted the now floundering U.S.-planned Free Trade Agreement of the Americas (FTAA), designed to unite all of Latin America and North America (except Cuba) in a hemispheric trade arrangement. Mercosur prohibits its members from signing FTAs with the U.S., and it is actively recruiting a South American trade bloc that would unify all of the region’s nations. The proposed Bank of the South, one of the potential projects of Mercosur, would offer an alternative source of finance to the International Monetary Fund (IMF) and other multilateral organizations—such as the World Bank—which do not necessarily have the best track record in favoring genuine development initiatives in Latin America.

Mercosur’s international influence is rising, and, so long as all its members play on the same team, it is likely to continue in this direction. The five full members of the trade group alone represents 250 million people over a span of 4.9 million square miles, with a GDP of $1 trillion. Whatever its shortcomings, the bloc provides its smaller members the ability to compete in the international community for more equal trade agreements. “I am not sure that Paraguay would have much success without being a part of Mercosur,” Paraguayan President Nicanor Duarte Frutos recently acknowledged. The regional alliance is currently involved in trade negotiations with India, Egypt, Morocco and South Africa, and, over the past few years, it has been ironing out the details of an agreement in difficult negotiations with the European Union. “Mercosur is becoming stronger every day, and more important in the world,” Brazilian Foreign Minister Celso Amorim insists. “Brazil could negotiate on its own with China, but together with Mercosur, it has more leverage.”

So what does the U.S. hope to get out of a TIFA with Uruguay? A piece of the answer might be a gradual undermining of Mercosur, catalyzed by Uruguay’s possible eventual departure from the trade bloc. The U.S. is banking on two different scenarios. If Uruguay decides to continue with its possible intent to sign a FTA with Washington, Mercosur ultimately will be faced with two decisions: it can either kick Uruguay out of the union, or it can alter its common external tariff to allow current members to enter into bilateral trade agreements with third parties. Either one could effectively weaken the bloc. If Uruguay leaves Mercosur, the bloc will lose one of its founding members, which could harm the international legitimacy of the union and its forward progression. However, if Uruguay is allowed to stay, and the bloc’s membership regulations are modified to accommodate a given nation’s desiderata, Mercosur will be setting a precedent regarding outside bilateral trade arrangements that could ultimately undermine its core principles. Signing a bilateral agreement with countries like the United States or the European Union while belonging to a regional integration block will obviously weaken Mercosur’s own integration process because it could generate deviations in trade patterns and impede the bloc’s capacity to enter into important negotiations.

If Mercosur fails in South America, it will open up the entire region to the possibility of being cherry picked (on a one-by-one basis) by individual trade agreements with the U.S. In its effort to sign an FTA with Uruguay, the U.S. may be taking advantage of a small, disenchanted Mercosur member in hopes of compromising South America’s existing trade bloc structure and shattering many of the region’s important aspirations.

The Members’ Reaction

After a meeting with Lula in 2006, Vasquez said that though “Brazil approved Uruguay’s negotiations with countries outside Mercosur,” Lula requested “no agreement damage the heart of the integration effort.” Directly referring to the common external tariff, Lula’s request permitted Uruguay to enter into a TIFA with the U.S. while prohibiting it from expanding the trade agreement to a FTA and directly violating Mercosur’s membership regulations.

Argentina’s Foreign Minister, Jorge Taiana, responded to Uruguay’s intentions in a similar manner when he acknowledged that Mercosur’s by-laws allow for “whatever a country can do to better itself… as long as it doesn’t affect the regional institution [Mercosur].” Paraguay’s Foreign Minister, Leila Rachid, was less supportive in his declaration that his nation would stand behind Mercosur and he rejected the idea that Asunción would follow Uruguay and seek bilateral trade arrangements with the U.S.

Saving Mercosur

Though Mercosur’s influence in the region has recently lagged, its past successes cannot be overlooked. In the past few years, trade between the bloc’s largest nations, Argentina and Brazil, has increased significantly. Its smaller members, Uruguay and Paraguay, also have experienced growth in the form of investment and structural changes and improvements to port and highway infrastructures, which have played an important role in trade both within and outside of the bloc. During the January summit, Brazil and Paraguay made plans to renegotiate the latter’s debt, and Venezuela agreed to take on payments on Ecuador’s foreign exposure. Lula and Venezuelan president Hugo Chávez, also signed a deal between their countries’ respective state-owned petroleum companies. The two presidents plan to construct an oil refinery in Brazil, search for new oil sites in Venezuela, and study the proposed 3,100-mile natural gas pipeline that stretches from Venezuela to the northeastern Brazilian city of Recife. The plan represents the first steps in Chávez’s hope to build a pan-American pipeline that would connect the Venezuelan oil fields to Argentina, passing through Brazil, Bolivia, Uruguay, and Paraguay along the way.

In light of these past and likely future successes, but wary of internal disputes and the impact of Uruguay’s growing closeness with the U.S., Lula reminded Mercosur’s members during the opening session of the summit that integration was a “gigantic challenge that requires sacrifices of personal interests and national ones.” He called on the full members to not lose sight of Mercosur’s goal and to keep in mind that the organization should assume that South America’s larger countries exist in order to aid its smaller ones. Comparing Mercosur’s situation with the European Union, which financially aided Spain, Portugal and Greece, Lula stated “the stronger countries must always be more generous and have policies to help the poorest.”

An FTA between Uruguay and the U.S. would destroy the last indigenous economic bloc powerful enough to prevent the U.S. from extending its fingers into all of Latin America. The world has seen what happens to small scale entrepreneurs, be they farmers or businessmen, as well as the fate of some of the smaller and weaker nations, when the U.S. is granted free trade rights within these less developed nations’ borders. Being placed under the mantle of FTA’s far from guarantees a mutually beneficial relationship. Newspaper dailies run recurrent stories about Mexican farmers and small businesses entrepreneurs who are unable to effectively compete with U.S. multinationals, and who are at times forced out of business by their highly competitive U.S. counterparts. Mercosur exists to unite South America under its own collective terms and to give smaller nations like Uruguay the necessary leverage to make substantial demands upon its trade partners. The U.S. is pushing for a South America that trades on the White House’s terms, under a FTAA. Uruguay is but the next step for it to project that influence.

This analysis was prepared by COHA Research Associate Katherine Hancy Wheeler
February 1st, 2007
Word Count: 2800

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